Meritage Homes Corps. (MTH)

(9 February 2017)

MTH Business Summary

Meritage designs, builds, and sells single-family homes, ranging from entry-level to semi-custom luxury in Arizona, Texas, California, Nevada, Colorado, Florida, and North Carolina

MTH Fundamentals

• Price to Earnings: 9.48
• Earnings Per Share: $3.54
• Market Cap: 1.4B
• Current Ratio: 7.97
• Return on Equity: 11.42%
• Return on Assets: 5.42%
• Dividend Yield: 0.00%
• Price to Sales: 0.53
• Price to Book: 0.82
• Price to Free Cash Flow: N/A

Balance Sheet ($ in Millions)

• Total Current Assets decreased $13.
• Total Assets increased $112.
• Total Current Liabilities increased $48.
• Total Liabilities Increased $72.
• Total Stockholder Equity increased $40.

Income Statement ($ in Millions)

• Total Revenues decreased $45.
• Income from Operations decreased $7.
• Net Income decreased $3.
• EBITDA decreased $7.

Cash Flow Statement ($ in Millions)

• Net Cash provided by operating activities decreased $9.
• Net Cash used in investing activities increased $1.
• Net Cash provided by financing activities increased $34.
• Free Cash Flow decreased $10.

Highlights from Last 10 10-Qs

• Trends are crucial, and when it comes to cash from operating activities, MTH presents a very cyclical trend; down, up, down, up … etc.
• After experiencing a horrible Q1, MTH rebounded nicely, losing less money in cash flow in Q2, but increasing their losses in cash flow by Q3.
• Revenues are also cyclical, with an average of 3 quarters of growth, followed by a quarter of decline. If the trend continues the way it is going, it could be due for another slow quarter in Q4.
• Operating income just as cyclical. Q4/14 was followed with steep decline in Q1/15. Q4/15 followed by a steep decline in Q1/16.
• Net income, same story.
• In terms of current assets, MTH is in the middle of a downturn cycle.
• However, total assets do present a consistent upward trend.
• Both current and total liabilities present an upward trend as well.

Entry Level: $30

• Given the cyclical nature of the companies balance sheets, the charts indicate similar patterns. Right now, I am comfortable with the $30 area, which presents solid support at that level.

Exit Level: $50+

• Using discounted cash flows, it’s fair value presents at $37.99. However, if the intrinsic values and metrics of the business still prevail above that level, I would be comfortable with riding it out to $50.

Reasoning

• Meritage Homes is part of the potential growing industry of Homebuilders that could see big gains in 2017.
• MTH completed 2016 with 16% increase in full year net earnings, and a 15% increase in home closing revenue.
• I like the Margin of Safety of 11%.
• What turns me off to this stock is the cyclical behavior of it’s balance sheets, income statements, and cash flow statements.
• However, I do not know the homebuilding industry well enough to know if this is common.
• What I do know is that MTH’s margins are better than nearly 70% of the companies in Global Residential Construction.
• As of right now, MTH is losing money, but they’ve been losing less and less money, which is nice.
• Because of these reasons, I would be much more comfortable buying MTH at the $30 range.
  • At $30 buy price, you would increase your margin of safety to 21%.